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the Court of the In- imiproad crossiz, at 1

bridges having a cost of $58,721.8 capital, were used in its business, and curs cost in acquiring the asset as to These improvements, aggregating produced economic benefits for it, which the deprecitation deduction is $2,146,141, were carried on the rail- thereby qualifying as contributions to asserted.? But there are other and difroad's books as capital assets even its capital under the cited section of ferent situations formally recognized though most of the agreements be- the 1939 Code. The three dissenting in the governing tax statutes. A fatween CB&Q and the several States judges disagreed with this interpreta- miliar example is gift property. Andid not expressly convey title to the tion of Brown Shoe, and, instead, re- other is property acquired by a corporailroad.

lied on Detroit Edison Co. v. Commis- ration from its shareholders as paid-in CB&Q instituted a timely suit in the sioner, 319 U.S. 98 (1943) [Ct. D. surplus or as a contribution to capital.9 Court of Claims alleging, among other 1582, 1943 C.B. 1019). They con- Another, and the one that is pertinent things, that it had overpaid its 1955 cluded that the critical features were here, is covered by $ 113(a) (8) 10 of federal income tax because it had the donor's attitude, purpose, and in the 1939 Code and by the contrasting failed to assert, as a deduction on its tent, and that, with governmental pay- provisions of $$ 362(a) and (c) of return as filed, allowable depreciation ments, there could be no intention to the 1954 Code, 26 U.S.C. $$ 362(a) on the subsidized assets. By a 4-to-3 confer a benefit upon CB&Q. Instead, and (c).11 This concerns a contribudecision on this issue (only one of sev- as the findings revealed, the intention eral in the case), the Court of Claims was to expedite traffic flow and to

* Section 113(a) of the 1939 Code and $ 1012 of the concluded that, under & 167 of the In- improve public safety at highway 1954 Code, 26 U.S. $ 1012, state the general rule that ternal Revenue Code of 1954, 26 railroad crossings. 197 Ct. Cl., at 315,

the “basis of property shall be the cost of such prop.

erty." U.S.C. § 167, CB&Q was entitled to 320, 455 F. 2d, at 1023, 1026.

& Section 113(a) (2) of the 1939 Code provides that the depreciation deduction it claimed. Because the Court of Claims de with respect to "property ... acquired by gift after This was on the theory that the sub

December 21, 1920, the basis shall be the same as it cision apparently would afford a prec

would be in the hands of the donor or the last preced. sidies qualified as contributions to the edent for the tax treatment of sub ing owner by whom it was not acquired by gift, ex. railroad's capital under $8 362 and stantial sums, we granted certiorari.

cept ...." This provision was carried over into

$ 1015(a) of the 1954 Code, 26 U.S. $ 1015(a). The 1052(c) of that Code, 26 U.S.C. 409 U.S. 947.

language of $ 362(c) of the 1954 Code, to the effect $$ 362 and 1052(c), and under $ 113

that the basis of a nonshareholder's contribution made (a) (8) of the Internal Revenue Code

on or after June 22, 1954, to the captial of a corpora.

tion shall be zero in the hands of the transferee, has of 1939.

Section 23(1) of the 1939 Code and been said not to affect the availability of a carryover In arriving at this conclusion, the its successor, § 167(a) of the 1954

basis with respect to gifts. See H.R. Rep. No. 1337,

83d Cong., 2d Sess., A128 (1954); S. Rep. No. 1622, Court of Claims majority relied on Code, 26 U.S.C. $ 167(a), allow a 83d Cong., 20 Sens., 272 (1954); B. Bittker & J. Eustice, Brown Shoe Co. v. Commissioner, 339

Federal Income Taxation of Corporations and Share. taxpayer “as a depreciation deduction U.S. 583 (1950) (Ct. D. 1731, 1950-1

holders, 1 3.14, pp. 3.51 and n. 81 (3d ed. 1971); 3A a reasonable allowance for the exhaus J. Mertens, Law of Federal Income Taxation, $ 21.134 C.B. 38), and reasoned that even

tion, wear and tear . . . of property (1968 rev.). though the governmental payments

Section 113(a) (8) of the 1939 Code; § 362(a) of used in the trade or business.” In the

the 1954 Code, 26 U.S.C. $ 362(a). for the facilities may not have been

usual situation the taxpayer itself in 10" 113. Adjusted basis for determining gain or intended as contributions to the rail

lose road's capital, the “principal purpose” 6 The Trial Commissioner and the Court of Claims

The Trial Commisioner and the Court of Claims

"(a) Basis (unadjusted) of property.

"The basis of property shall be the cost of such made the following finding of fact: being, instead, “to benefit the com

"9. The facilities noted in finding 7 were constructed

property; except that munity-at-large,” 197 Ct. Cl., at 276, primarily for the benefit of the public to improve 455 F. 2d, at 1000, the facilities did in

“(8) Property acquired by issuance of stock or as safety and to expedite highway traffic flow. Plaintiff

paid-in surplus. (CB&Q), however, received benefits from the facilities, fact enlarge the railroad's working among others, probable lower accident rales, reduced

"If the property was acquired after December 31, expenses of operating crossing facilities, and, where

1920, by a corporation• The Court of Claims, both the majority and dis. permitted, higher train speed limits, all of which per.

"(A) by the issuance of its stock or securities in senters, anserted, and indeed found, that the $1,538,543 mitted plaintiff to function more efficiently and pre.

connection with a transaction described in section figure related to highway undercrossings and overcross. sumably less expensively." 197 Ct. Ci., at 326-327.

112(b) (5) (including, also, cases where part of the ings. 197 Ct. Cl. 264, 271-272, 325, 455 F. 2d 993, 997. 6 The Solicitor General asserts, Petition for Certiorari

consideration for the transfer of such property to the 998 (1972). CB&Q, in its Brief, p. 3, and in oral argu. 15-16, that $623,000,000 in federal funds were paid out

corporation was property or money, in addition to such ment, Tr. of Oral Arg. 25, claims that this figure has for projects and improvements at railroad-highway grade

stock or securities), or to do only with railroad bridges and that the assets crossingo alone between 1934 and 1954. See U.S. De

"(B) as paid in surplus or as a contribution to sought to be depreciated relate only to railroad use. partment of Transportation, Report to Congress: Rail.

capital, then the basis shall be the same as it would According to CB&Q, no facilities directly related to road - Highway Safety, Part I: A Comprehensive State.

be in the hands of the transferor, increased in the highway use are involved. Inasmuch as the resolution ment of the Problem 38 (1971). The Commissioner of

amount of gain or decreased in the amount of loss of this factual issue would not affect the result we Internal Revenue estimates that, taking into account

recognized to the transferor upon such transfer under reach, it need not be resolved. grants of this kind to railroads and federal grants to

the law applicable to the year in which the transfer • The parties are in agreement as to what the ad. utility companies, depreciation on property with as

was made." justed bases of the assets inquestion would be, and as serted cost bases between a hall billion and one bil.

11 "G 362. Basis to corporations. to the applicable rates of depreciation, if depreciation lion dollars is dependent upon the resolution of this “(a) Property acquired by issuance of stock or as for tax purposes is allowable at all.

issue and is still litigable. Petition for Certiorari 16. paid in surplus.

tion to capital by a nonshareholder. in Brown Shoe and led to the enact the cost paid by customers and not reSee Treas. Reg. 111, § 29.113(a) (8)-1 ment of the zero basis provision, re- fundable. The Board of Tax Appeals, (1943). Under $$ 113(a) (8) and 114 ferred to above, in § 362(c) of the 45 B.T.A. 358 (1941), and the Court (a) of the earlier Code, the nonshare. 1954 Code, 26 U.S.C. § 362(c). Vet- of Appeals, 131 F.2d 619 (CA6 holder-contributed assets in the hands erans Foundation v. Commissioner, 1942), sustained the Commissioner. of the receiving corporation had the 317 F. 2d 456, 458 (CA10 1963). This Court affirmed. same basis, subject to adjustment, for CB&O argues that this very result Mr. Justice Jackson, speaking for a reciation purposes as it had in the should follow here. It is said that the unanimous Court (the Chief Justice

of the transferor; under the railroad received no taxable income not participating), observed, “The end 1954 Code, however, its basis for the and incurred no income tax liability and purpose of it all (depreciation) is transferee is zero.

when it received, at governmental ex- to approximate and reflect the finanertinent to all this is the Court's pense prior to June 22, 1954, the fa- cial consequences to the taxpayer of decision in Edwards v. Cuba Railroad, cilities as to which CB&O now asserts the subtle effects of time and use on 268 U.S. 628 (1925) T.D. 3728, IV-2 depreciation. And. in providing the the value of his capital assets.” 319 (1925) C.B. 122). The Court there facilities, CB&Q argues, the Govern.

U.S., at 101. The statute, § 113(a) of

U.S., at 101. The held that subsidies granted by the

granted by the ment intended to make a contribution the 1936 Act, it was said, “means ... Cuban Government to a railroad to to the railroad's capital. within the cost to the taxpayer,” even though the promote construction in Cuba “were meaning of 8 11362)

were meaning of $ 113(a) (8), thereby per- property“may have a cost history not profits or gains from the use or

se os

mitting CB&

mitting CB&Q to depreciate the Gov. quite different from its cost to the taxoperation of the railroad," and did

ernment's cost in the assets. Whether payer.” Also, the “taxpayer's outlay is not constitute income to the rceiving the governmental subsidies qualified the measure of his recoupment through

poration. 208 U.S., at 633. The as income to the railroad is an issue depreciation accruals.” 319 U.S., at holding in Edwards, taken with § 113 not raised in this case, and we inti. 102. The utility's attempt to avoid this (a) (8) of the 1939 Code, produced a mate no opinion with respect to it. result by its contention that the payseemingly anomalous result, for it The United States, however, asserts ments were gifts or contributions to its meant that a corporate taxpayer re- that the subsidies did not constitute a capital, and entitled to the transferors' ceiving property from a nonshare. “contribution to capital” under & 113 bases, was rejected. holder as a contribution to capital not (a) (8) and that accordingly

(a) (8) and that, accordingly, the

the

“It is enough to say that it overonly received the property free from transferee railroad's tax basis is zero taxes imagination to regard the farm

me tax but was allowed to assert and no depreciation deduction is ers and other customers who furnished a deduction for depreciation on the available.

these funds as makers either of donaasset so received tax free. This result

Our inquiry, therefore, is a narrow

tions or contributions to the Comalso ensued under the Court's holding one: whether the nonshareholder pay

pany. The transaction neither in form ment in this case constituted a "con

nor in substance bore such a semblance. “If property was acquired on or after June 22, 1954, by a corporation

tribution to capital,” within the mean “The payments were to the cus"(1) in connection with a transaction to which sec

ing of $ 113(a) (8). Because both tomer the price of the service. ... tion 351 (relating to transfer of property to corpora. tion controlled by transferor) applies, or

Detroit Edison and Brown Shoe bear They have not been taxed as income. "(2) as paid-in surplus or as a contribution to cap upon the issue, we turn to those two ... But it does not follow that the decisions.

Company must be permitted to recoup the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

through untaxed depreciation accruals

on investment it has refused to make." "(c) Special rule for certain contributions to capital. “(1) Property other than money.

Detroit Edison concerned customers' 319 U.S., at 102-103. "Notwithstanding subsection (a) (2), il property other payments to a utility for the estimated Detroit Edison, by itself, would ap

costs of construction of service facil- pear almost to foreclose CB&Q's claims "(A) is acquired by a corporation, on or after June 22, 1954, as a contribution to capital, and

ities (primary power lines) that the here, for there is an obvious parallel "(B) is not contributed by a shareholder such, utility otherwise was not obligated to between the customers' payment for then the basis of such property shall be zero.

provide. For its tax years 1936 and (2) Money.

the utility service facilities in Detroit “Notwithstanding subsection (a) (2), if money, 1937, to which the Revenue Act of Edison, and the governmental pay“(A) is received by a corporation, on or after June

1936, 49 Stat. 1648, applied, the util- ments for improvements to the rail22, 1954, as a contribution to capital, and

“(B) is not contributed by a shareholder os such, ity claimed the full cost of the facilities road's service facilities in the case bethen the basis of any property acquired with such in its base for computing depreciation. fore us.. money during the 12-month period beginning on the

The Commissioner disallowed, for de But Detroit Edison was not the last day the contribution is received shall be reduced by the amount of such contribution."

preciation purposes, that portion of word. Brown Shoe was decided seven

hieal," wit Because bear

ital, then the basis shall be the same as it would be in

than money

Mr. un 8-1 vote o fesult “such

years later, and the opposite tax result was reached by an 8-1 vote of the Court, with Mr. Justice Black in dissent without opinion.

Brown Shoe concerned a corporate taxpayer's excess profits tax, under the Second Revenue Act of 1940, 54 Stat. 974, as amended, for its fiscal years 1942 and 1943. Community groups paid cash or transferred property to the taxpayer as an inducement for the location or expansion of factory operations in their communities. Contracts were entered into, and in each instance the taxpayer obligated itself to locate or enlarge a facility in the community and to operate it for at least a minimum term. The value of the payments and transfers were the focus of the controversy between the taxpayer and the Commissioner, for depreciation on the transferred assets was claimed and their inclusion in equity invested capital was asserted. The Tax Court overruled the Commissioner's disallowance with respect to the acquisitions paid for with cash but sustained the Commissioner with respect to buildings transferred. 10 T.C. 291 (1948). The Court of Appeals upheld the Commissioner on both items. 175 F. 2d 305 (CA8 1949). This Court reversed.

Mr. Justice Clark, writing the opinion for the majority of the Court, concluded that the assets transferred by the community groups to the taxpayer were contributions to capital, within the meaning of g 113(a) (8) of the 1939 Code. The Court noted that

time they would wear out and, it the taxpayer continued in business, the physical plant eventually would have to be replaced. Detroit Edison was cited and recognized, but was considered not to be controlling. In Brown Shoe there were “neither customers nor payments for service," and therefore the Court "may infer a different purpose in the transactions between petitioner and the community groups.” 339 U.S., at 591. The only expectation of the groups was that

"such contributions might prove ads with the economic and business convantageous to the community at sequences of the transaction seems large.” Thus, it was said, “the trans- self-evident. 18 In both cases the asfers manifested a definite purpose to sets transferred were actually used in enlarge the working capital of the the transferee's trade or business for

the production of income. In neither company outbidshus prof

The Court thus professed to dis- case did the transferee tinguish and not at all to overrule vestment for the assets sought to be Detroit Edison. It did so on an analy- depreciated. Yet in both cases, the sis of the purposes behind the respec- assets in question were transferred for tive transfers in the two cases. Where a consideration pursuant to an agreethe facts were such that the trans- ment. Ii, at first gland ferors could not be regarded as having son and Brown Shoe seem somewhat intended to make contributions to the inconsistent, they may be reconciled, corporations, as in Detroit Edison, the and indeed must be, on the ground assets transferred were not deprecia- that in Detroit Edison the transferor ble. But where the transfers were intended no contribution to the transmade with the purpose not of receive feree's capital, whereas in Brown Shoe ing direct service or recompense but the transferors did have that intent. only of obtaining advantage for the The statutory phrase "contribution general community, as in Brown Shoe, to capital” is nowhere expressly dethe result was a contribution to capital. fined in either the 1939 Code or the III

1954 Code, and our prior decisions

provide only limited guidance as to its It seems fair to say that neither in

precise meaning. Detroit Edison might Detroit Edison nor in Brown Shoe did

be said to be only a holding that a the Court focus upon the use to which

payment for services is not a contributhe assets transferred were applied, or

tion to capital. Brown Shoe sheds little upon the economic and business con

additional light, for the Court stated sequences for the transferee corpora

only that because the community paytion. Instead, the Court stressed the

ments were not compensation for intent or motive of the transferor and

specific services rendered, and did not determined the tax character of the

constitute gifts, they must have been transaction by that intent or motive.

made in order to enlarge the working Thus, the decisional distinction be

capital of the company. 339 U.S., at tween Detroit Edison and Brown Shoe 50 rested upon the nature of the benefit

But other characteristics of a contrito the transferor, rather than to the

bution to capital are implicit in the transferee, and upon whether that

two cases and become apparent when benefit was direct or indirect, specific viewed in the light of the facts presor general, certain or speculative.12

ently before us. In Brown Shoe, for exThese factors, of course, are simply

ample, the contributed funds were indicia of the transferor's intent or motive.

591.

18 The distinctions wrought by Detroit Edison and

Brown Shoe have been the subject of scholarly criti. That this line of inquiry, and these

cism. See, for example, Note, Taxation of Nonsharedistinctions, have relatively little to do holder Contributions to Corporate Capital, 82 Harv. L.

Rev. 619 (1969); Landis, Contributions to Capital of 19 See for example, Teleservice Co. v. Commissioner,

Corporations, 24 Tux L. Rev. 241 (1969); Noto, Tex 254 F. 2d 105 (CA3), cert. denied, 357 U.S. 919

Consequences of Non-Shareholder Contributions to Cor. (1959); United Grocers, Led. v. United States, 308 F. porate Capital, 66 Yale L. J. 1085 (1957); Freeman & 2d 634 (CA9 1962). There is support in the legislative Speiller, Tax Consequences of Subsidies to Induce history of $ 118 of the 1954 Code, 26 U.S.C. $ 118, Business Location, 9 Tex. L. Rev. 255 (1954). In the providing for the exclusion from gross income of "any article last cited the author suggest that Detroit Edi. contribution to the capital of the taxpayer," for the son and Brown Shoe are irreconcilable, the latter in indirect benefit-prepayment-for-future-services distinc. effect overruling the former. Id., at 262. See also The tion. H.R. Rep No. 1337, 83d Cong., 2d Sess., 17 Supreme Court, 1949 Term, 64 Herv. L. Rev. 114, (1954).

149.151 (1950)

nefit not only the trans

(1935). The transaction would accept counter Davis of the Court of cl., at

ees not thereisingerCAZ 1942

intended to benefit not only the trans- v. Walters, 294 U.S. 405, 421-424 tion reserve under these circumstances, ferors but the transferee as well, for (1935). The transaction in substance as a matter of good business and acthe assets were put to immediate use was unilateral; CB&Q would accept counting practice, the answer is, as by the taxpayer for the generation of the facilities if the Government would Judge Davis of the Court of Claims additional income. Without benefit to require their construction and would observed in dissent, 197 Ct. Cl., at the taxpayer, the agreement certainly pay for them. Any incremental eco- 318, 455 F. 2d, at 1025, “Depreciation would not have been made. Perhaps to nomic benefit to CB&Q from the fa- reflects the cost of an existing capital some extent this was true in Detroit cilities was marginal; its extent and asset, not the cost of a potential reEdison; that taxpayer, however, was importance were indicated and ac- placement.Reisinger v. Commissiona public utility, and the anticipated counted for by the requirement that er, 144 F. 2d 475, 478 (CA2 1944). revenue from the service lines to the the railroad pay not to exceed 10% of See United States v. Ludey, 274 U.S. customers would not have warranted the cost in relation to its own benefit.15 295, 300-301 (1927) [T.D. 4046, VI-2 the investment by the utility itself. The facilities were peripheral to its (1927) C.B. 157]; Weiss v. Wienet, 319 U.S., at 99. Its benefit, therefore, business and did not materially con- 279 U.S. 333, 335-336 (1929) (Ct. D. was marginal.

tribute to the production of further 60, VIII-1 (1929) C.B. 257); HelverWe can distill from these two cases income by the railroad. They simplying v. Lazarus & Co., 308 U.S. 252, some of the characteristics of a non- replaced existing facilities or provided 254 (1939) (Ct. D. 1430, 1939-2 C.B. shareholder contribution to capital un- new, better, and safer ones where none 208]; Massey Motors v. United States, der the Internal Revenue Codes. It otherwise would have been deemed 364 U.S. 92 (1960) (Ct. D. 1847, certainly must become a permanent necessary. As the Court of Claims 1960-2 C.B. 445); Fribourg Nav. Co. part of the transferee's working capital found, the facilities were constructed v. Commissioner, 383 U.S. 272 (1966) structure. It may not be compensa- "primarily for the benefit of the public (Ct. D. 1909, 1966-2 C.B. 60). tion, such as a direct payment for a to improve safety and to expedite

We conclude that the governmental specific, quantifiable service provided highway traffic flow,” 16 and the need

subsidies did not constitute contribufor the transferor by the transferee. It of the railroad for capital funds was

tions to CB&Q's capital, within the must be bargained for. The asset not considered. 197 Ct. Cl., at 326.

meaning of § 113(a) (8) of the 1939 transferred foreseeably must result in While some incremental benefit from

Code; that the assets in question in benefit to the transferee in an amount lower accident rates, from reduced ex

the hands of CB&Q have a zero basis, commensurate with its value. And the penses of operating crossing facilities,

under $$ 113 and 114 of that Code asset ordinarily, if not always, will be and from possibly higher train speed

and § 1052(c) of the 1954 Code, 26 employed in or contribute to the pro- might have resulted, these were inci

U.S.C. § 1052(c); and that CB&Q is duction of additional income and its dental and insubstantial in relation to therefore precluded from claiming a value assured in that respect. the value now sought to be depreci

depreciation allowance with respect to By this measure, the assets with ated, and they were presumably con

those assets. 17 The judgment of the which this case is concerned clearly do sidered in computing the railroad's

Court of Claims on this issue is renot qualify as contributions to capital. maximum 10% liability under the

versed and the case is remanded for Although the assets were not pay. Act. In our view, no substantial in

further proceedings. ments for specific, quantifiable serv- cremental benefit in terms of the proices performed by CB&Q for the Gov. duction of income was foreseeable or

It is so ordered. ernment as a customer, other charac- taken into consideration at the time

Mr. Justice Powell took no part in teristics of the transaction lead us to the facilities were transferred. Accordthe conclusion that, despite this, the ingly, no contribution to capital was

the consideration or decision of this

case. assets did not qualify as contributions effected. to capital. The facilities were not in

CB&Q nevertheless contends that it any real sense bargained for by CB&Q. is entitled to depreciate the facilities

17 The Government has argued, in the alternative, Indeed, except for the orders by state

because of its obligation to maintain that, by virtue of u terms letter agreement entered into commissions and the governmental

by CB&Q and the Commissioner with respect to a and replace them. Whatever may be subsidies, the facilities most likely

change in the railroad's accounting method from retire. the desirability of creating a deprecia ment to straight-line depreciation, CB&Q irrevocably would not have been constructed at

agreed to exclude donated property, or contributions or all.14 See Nashville, C. & St. L. R. Co.

grants in aid of construction from any source, from

its depreciation base. Because of our conclusion that 14 Counsel for CB&Q stated at oral argument that the 15 The Government does not challenge the CB&Q's

the governmental payments did not qualify as contribu.

tions to capital, we need not determine whether the construct these facilities" that were funded by the gov. it was required to pay.

terms letter agreement barred 'CB&Q from claiming deernmental subsidies. Tr. of Oral Arg. 30, 35-36.

16 See n. 5, supre.

preciation on the assets in question.

railroad was under a "preexisting legal obligation to

right to depreciate those portions of a facility for which

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